Commercial and political economies

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It does seem odd that insolvent countries need to pay lower interest rates than profitable commercial banks but it looks like lending banks have been convinced by governments and central banks that sovereign nations are to big to fail.

So lenders indulge in the carry trade — government underwritten funds at low interest to be lent to sovereigns at a slightly higher interest at no perceived risk. This is what governments want lenders to do with these funds.

The alternative is to lend to a commercial bank at a higher rate of interest and face a risk of default. Now, a bank like the Commonwealth has two layers of major risk. The first is the parlous state of the overpriced real estate market. The second is the high level of the $A, which means that some time in the future the $A may depreciate in value, further eroding the purchasing power of the investors’ euros or $US.

Better to take the easy returns. Therefore the Commonwealth Bank is forced to accept higher funding costs.

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